How can increased transparency help crowdfunding for R&I grow?
Investors are reluctant to invest in, crowdfunding for research and innovation, in particular, due to extremely high risk, insufficient early stage market knowledge and legal issues. Thus, they mention increased transparency as one of the main aspects that would help crowdfunding for R&I to grow.
During focus groups performed for the crowdfunding4innovation.eu study, stakeholders mentioned that in some countries crowdfunding doesn’t develop as quickly as in other. Besides the cultural aspect, the regulation of a country’s alternative financing opportunities is being highlighted as an important driver. Nevertheless, the interviewed investors agree that currently, it is better to identify the weaknesses and strengths of different financing instruments depending on the topic, maturity or attractiveness instead of regulating new emerging financing instruments.
For investors the risk of early stage investing, i.e. investing in R&I crowdfunding campaigns, is very high due to the missing market knowledge. So we come to raise the question: how to pre-select and validate research and innovation projects?
- One of the suggestions is the creation of a scientific advisory forum, composed of the renowned experts in the field, to assess the reliability of the projects specializing in research and innovation.
- How about using the EU Horizon 2020 preselection results as a guarantee of a quality of projects - projects that did not receive funding but met the required assessment threshold could be further presented as pre´checked projects on crowdfunding platform.
- Another concept in case of equity-based crowdfunding is a European quality label granted as a certification to platforms under the condition of fulfilling a set of requirements. It can also include certification for crowdfunding professionals following an example of Germany.
How to protect investors?
The lack of transparency about the fundraiser is considered as a major risk by investors. This is is especially relevant for science related projects, as they are complex in nature, and not easily understood and require an increased level of trust / guarantee for investors.
That could be solved by:
- A system of self-regulation that could strengthen trust between the stakeholders of the ecosystem, where the code of conduct can be developed by the crowdfunding industry itself. It could also be facilitated or with possible coordination of European institutions. For example, The European Crowdfunding Network has developed a Code of Conduct for its members. Another example is Code of Practice developed by UK Crowdfunding Association.
- Such Code of Conduct could also include a requirement for the standardisation of the reporting the results of crowdfunding campaigns. Currently the way the risk assessment and project evaluation are carried out by platforms is not clear. Consistency in defining Key Performance Indicators (KPIs) for platforms would enhance ways to leverage self-regulation of crowdfunding platforms.
- That could be supported by creation of an EU level hub with strong alliance between industry, universities, entrepreneurs and governments.
- Investors suggests also that stricter rules could be applied on platforms with regards to communication of their evaluation process. EU / EIF could, for example, provide criteria for evaluation processes of equity and lending projects focusing on innovation.
- Investors would welcome EC guarantees or co-investments as a way to manage risks. While, for lending platforms, a guarantee seems to be a better option for reducing the risk, co-funding was seen to be more interesting for equity-based investments as this leverages the funding. For example, BPI France gives a 50% guarantee to projects on chosen crowdfunding platform. Recently, European Investment Fund has invested in securitized loans from Funding Circle backed by EIF guarantee.
These are some of the policy scenarios that will be discussed during European Policy Workshop, 18 November 2016 in Brussels.
Which solutions would you recommend?
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